Archive - Jul 20, 2011 - Story

The rumors were true: after printing on the verge of a contraction back in June, July's HSBC Manufacturing PMI is now sub 50, or 48.9: the first sub-50 print in this particular series in a year. This confirms that the manufacturing sector is now in contraction mode. The immediate kneejerk response is a 20 pip slide in the EURUSD which has retraced half the surge on the earlier, and repeatedly priced in, news about the nth Greek bailout. Now if only China could slow down that inflation to go alongside its economic contraction, which unfortunately as the following chart from Bloomberg demonstrates, will be a difficult proposition.

A few weeks ago we first reported what, according to Bill Gross, the upcoming QE episode may look like: namely a version of Operation Twist from the 60's in which the short-end of the curve -arguably the 2 or 3rd year point- is locked, resulting in a record steep yield curve while allowing ongoing bond monetizations to proceed. While that is a useful frame of reference, a far more relevant observation is what the man in charge of the world's largest bond portfolio -none other than the FRBNY's Brian Sack- has to say about what the future of QE holds, which he conveniently has done in a speech to Money Marketeers today titled, "The SOMA Portfolio at $2.654 Trillion." In addition to the future of the Fed's SOMA, Sack shares some other much needed information such as the trading details of the QE program from the view of the Fed, his perspective on the QE2's strengths and weaknesses, and his overall assessment of the program's effectiveness. Not to mention his admission that the Fed now carries 200% more interest rate risk than it should...

The EURUSD is pushing higher in the low volume afterhours session after a Reuter report that the German and French delegations have reached an agreement over Greece. Since this is about the 6th "pricing in" of Greek bailout, we can't help but be extremely skeptical that this short-lived bounce will promptly reverse especially since the USD is about to pop on comparable good news to come out from the Obama meeting with Boehner.

Remember how ole' Ronnie bankrupted the Evil Empire by forcing them to build ever more and more nukes, leading to the collapse of the communist empire and unleashing a whole lot of upscale Wall Street prostitution rings in the process? Maybe the CIA can do the same back home, because if the Russian "post default" debt/GDP is any indication perhaps it is time Regan's ghost gave the order to bankrupt none other than the "good empire": the good old US of A. Here is Russian debt/GDP, based on CIA historical data and IMF projections. No "Kolhoz of 6" in Moscow any time soon.

When we presented the Gang of Six joke of a deficit-cutting "plan" we called it a "talking point bulletin full of ridiculous fluff with nothing substantial." It appears that at least Paul Ryan seems to agree: "The plan is not a budget.  It is a set of talking points and graphs
that outlines an ambitious proposal that has serious flaws but also the
potential for worthwhile budget and tax reforms." The Wisconsin Congressman has just released a much needed follow up to the 4 page chart book (disclosed previously here), which confirms that the "Compromise" plan is DOA in the Congress.... 48 hours away from D-Day: "The following analysis
examines these problems, raises questions about the lack of detail in
the plan, and notes the areas where there is potential to make progress
on spending restraint and tax reform."

No point in getting too greedy: after the latest spread compression opportunity was presented courtesy of yesterday's late afternoon ramp on speculation of a debt deal, breaking the ES-RISK correlation, and taking it to a 12 point spread, it has since contracted to a nearly negligible 4 points as of last check. The only thing better than free money from a 100% spread closure is 66% spread closure.At $50 per ES contract pt (coupled with a comparable DV01 match on the synthetic RISK side) this is $450 profit (on only ~$5k margin), or around 9% return in one day. We'll take it. Spread entry/exit points provided as usual by Capital Context.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/07/11

That giant whooshing, and humming, sound you hear are all the printers at the basement of Marriner Eccles getting refills and start the warm up process. Because according to the Fed Charles Plosser the Federal Reserve is actively preparing for the possibility that the United States could default. Which can only mean one thing: an immediate paradrop of millions of $100 bricks to every man woman and child in the US since as we all know by know Tim Geithner has repeatedly confirmed the Treasury has absolutely no default plans. None.

For those who are about to get cerebral hemorrhage trying to figure out the ensuing math, don't worry: it is all based on Marx to Myth.

Shocker: the bank of Warren Buffett, that paragon of virtue and decency, busted by the capo di tutti ZIRP capi itself for lying to grandma? Surely WFC investors, who don't have to deal with their investment either admitting or denying wrongdoing, can "suck it in" and we can get Charlie Munger to preach some more fire and brimstone morality about the evils of gold and the miracles of taxpayer bailouts.

You know you want to know who has been named...

Morgan Stanley, traditionally the second most Kool-aidy bank on Wall Street, just after Deutsche Bank (and specifically the Germans' head economist) begins its latest report on the challenges facing the "global central bank" on a rather downbeat note: "Slowing growth is threatening the creditless, jobless recovery in the US and the Fed stands ready to act. The European flu has flared up and the risks to the ECB’s strategy of normalising policy have risen markedly. And emerging market central banks are balancing domestic growth against downside risks to developed market economies as they keep policy from becoming restrictive or even tightening too quickly. The world today appears to be in an eerily similar place to mid-2010." Hmm, where have we heard this 2011=2010 theme before... Anyway, it gets worse: "there are some important differences too. This time, the US and euro area economies are facing downside risks to growth just as normalising monetary policy is slowing EM economies down too. A year ago, EM monetary policy was still stimulative and domestic demand growth was encouraged as output gaps were still negative. The risks to global growth today are thus broader now than they were last year. At the same time, the thresholds for central banks to ease appear to be higher this year too. Rising core inflation in the US, elevated inflation in the euro area and a recent battle with inflation in the EM world all make it difficult for central banks to abruptly reverse the direction of policy. A look at the challenges facing DM and EM central banks has the Fed, the ECB and the RBA facing the biggest downside risks to growth in the DM world while the ECB (again), the BoE and the Riksbank face immediate inflation concerns. In the EM world, central bankers have no time to rest despite a recent victorious battle with that old enemy, inflation. European contagion and weaker global growth should keep policy-makers there on their toes for the next few months." Indeed it should, but with so many central bank actors, each of which experiencing their own set of unique challenges, who can keep track of all the often times opposing responses that the central planners are presented with? Well, courtesy of this handy, dandy tearsheet from MS, now you can too.

A must watch profile of the man at the heart of the "The Big Short" and one of the first to come up with the subprime trade.

Time for the hourly update on the Congressional soap. The Hill reports that "Congressional Democratic leaders are headed back to the White House on Wednesday for more talks on raising the debt ceiling. White House press secretary Jay Carney announced House and Senate Democratic would meet with Obama at the White House at 2:50 p.m. Obama called Senate Majority Leader Harry Reid (D-Nev.), Senate GOP Leader Mitch McConnell (Ky.), Speaker John Boehner (R-Ohio) and House Minority Leader Nancy Pelosi (D-Calif.) on Tuesday night." It adds that after the release of a new proposal Tuesday by the bipartisan Senate Gang of Six, Obama told reporters it was time for leaders to "talk turkey" and work to reach a deal. And while there has been a recent increase in voices against the $3.7 trillion "plan", the fate of the McConnell fall back plan, which as expected is the most likely to pass as it is completely toothless, is also looking shaky:"House Democratic leaders are attacking Senate Minority Leader Mitch McConnell’s (R-Ky.) debt-ceiling fallback plan, characterizing it as a political ruse intended to scapegoat Democrats and taint them at the polls. “I’m not a fan of the McConnell proposal,” Rep. Chris Van Hollen (Md.), the senior Democrat on the House Budget Committee, said Tuesday during a press briefing in the Capitol. “It’s designed to protect mostly Republican members of Congress from taking responsibility for votes that they’ve already made." How this plan makes sense in light of Obama's earlier statement that the House would not compromise a debt ceiling plan based on one time increases to the limit, without a long-term debt ceiling extension is unclear, nor is it clear how any of these plans which are simply window dressing will pass muster from the rating agencies, where even Fitch earlier announced any plan would have to be comprehensive for no downgrade of the US to occur. Translated: the CRAs need more stuffing for the Christmas stockings.

In the past two weeks, one of the curious development the monetary aggregates, in addition to a spike in the Adjusted Monetary Base (discussed previously here), was the $88.7 billion surge in the M2 for the week ended July 4, the third largest jump in the broadest tracked monetary aggregate in history. Some have speculated that this number may be indicative that the money multiplier has once again started working as bank reserves after 2 long years, finally start making their way into the broader market. Unfortunately as Stone McCarthy explains this is not the case at all (sorry Fed: QE is still a failure) but merely has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits inclusive of money market deposit accounts, which have jumped by $110 billion in the past two weeks, coupled with an accelerating shift of dollar deposits back to banks domiciled in the US. In other words: regulation explains the entire move. There is, however, a kicker, and it goes to another indicator of "economic growth" - the leading economic index, which is actually driven by M2. This means that the fake surge in the M2, will result in an all too real jump in the LEI, which in turn will push the market higher as vacuum tubes interpret the data as positive for the economy as opposed to merely driven by a regulatory forced shift of money from Pile A to Pile B. Expect stocks to surge once the next LEI reading is announced as a result.